HL SELECT UK GROWTH SHARES

Introducing Schroders

Fund changes

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

Charlie Huggins (CFA) - Fund Manager

30 May 2018

2018 has seen higher levels of stock market volatility than in recent years. This has started to throw up some interesting investment opportunities which we’ve been able to take advantage of. In March we added Alfa Financial and Rentokil to the fund which we talked about in a previous blog. More recently we’ve introduced another new holding – Schroders.

Schroders is one of the world’s largest investment managers with £438 billion of assets under administration and a long track record of growing assets, profits and dividends. A full rationale for this purchase is available on the portfolio breakdown page. Please remember past performance is not a guide to future returns and dividends are variable and are not guaranteed.

Family-owned

One of the main attractions for us is the on-going influence of the Schroder family, who still own 48% of the company’s ordinary shares and over 87% of the voting rights. Established in 1804, Schroders is rightly proud of its culture and heritage, as their annual report highlights:

“The Board pays great attention to the culture of the firm which we believe, built over many years, represents a key competitive advantage. We consider culture in many aspects of our Board discussions, including when reviewing acquisition opportunities where cultural alignment is a major factor in our decision making."

The family influence means that Schroders can afford to take a long term view with its decision making. In fact the phrase ‘long-term’ appears 60 times in its annual report. Below is another snippet from the report:

“What makes us different is our long-term approach, whether it’s investing in the future growth of the business, developing talent or building client relationships. This long-term perspective comes from our ownership structure and strong capital base. It means we can remain focused on our strategy and take advantage of opportunities in any market environment.”

As long-term investors, we care more about where profits will be in five or ten years’ time than where they will be in the next quarter. We like companies that take a similarly long-term perspective and foster cultures geared towards sustaining success over decades.

Lots of firepower

Schroder’s passes this test with flying colours. The business is very conservatively financed, with no long-term debt and plenty of surplus capital. This gives it lots of firepower to invest in both good times and bad.

Because Schroders gets paid fees based on assets under management, its profits are very sensitive to the level of stock markets. While we have no idea where stock markets are heading in the short term, history tells us that stock markets have tended to rise in the long term. Although this, of course, is never guaranteed to continue.

Rising stock markets which grow assets under management should act as a useful tailwind to the business over time. And with this, the global population is getting older and wealthier which means more money is going to be funnelled into savings and investment solutions.

Although low-cost trackers have gained increased attention in recent years, we think there will always be demand for active managers with tailored investment propositions and strong long term track records.

A little quirk

A little quirk with Schroders is that it has two share classes – one with voting rights (SDR) and the other without (SDRC). We have chosen to invest in the non-voting share class. Other than the right to vote, and lower liquidity for the non-voting shares, there is no difference between the two.

However, the non-voting shares trade at more than a 20% discount to the voting shares. Because the non-voters receive exactly the same dividend payments as the voters, they offer a significantly higher yield.

The limited liquidity for the non-voters means we have had to build up our position steadily over a number of weeks. As we were buying the price kept moving higher and so we decided to stand back once we’d established a decent sized position. If the shares come back, we may add to our position further but for now we are happy with a c. 2% weighting.

View portfolio breakdown

More about HL Select UK Growth Shares

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for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.